The Zigmont Report (Daily Market Recap for 5/15/18)

Mike Zigmont

Mike Zigmont, author of the Zigmont Report, is a partner at New York-based Harvest Volatility Management, a hedge fund with over $10B AUM, offering volatility management solutions to its investor base worldwide.  Mike has been publishing his daily newsletter (Monday-Friday) privately for the firm’s investors and his personal contacts in the investment business since 2008, sending it daily shortly after the market close.

The opinions expressed below are my own

Interest rates.  Today US treasury yields climbed across the curve and they climbed materially.  Yields popped up 2-7 bips across the curve and the very closely watched 10-year treasury broke through 3% convincingly.

What prompted this interest rate climb?  Good question.  Rates climbed slowly in the morning and jumped just *before* these economic releases:

  • Apr Empire manufacturing (20.1 vs 15.0 est & 15.8 prior)
  • Apr advanced retails sales MoM (0.3% vs 0.3% est & 0.8% prior revised from 0.6%)

Hmmm.  These aren’t shocking surprises but they are a little strong.  Puzzling…they certainly don’t suggest a big change in the economic landscape.

That said, the narrative on the Street today is that this data spooked the markets into thinking the Fed would be more hawkish and so yields climbed, broke through some technical resistances and gathered momentum.  The higher rates pressured stocks lower.

That was/is the narrative.

I agree that higher rates pressured stocks but I disagree with the spin that the economic releases spurred a hawkish fear in treasuries.  The yields jumped about 2 minutes before the releases and the releases aren’t that significant anyway.  The economic data isn’t compelling (to me).  Why would the bond market think *this* was the straw that breaks the camel’s back?

Anyway, I say forget the why and let’s focus on the what.

Rates are climbing again.  Stocks are responding.

Is this temporary or will this continue?

I think it will continue.  The Fed isn’t about to stop hiking and 3% (or thereabouts) is the destination  for short term rates.  That means we’re only about halfway done when it comes to climbing rates.

Here’s the change in the treasury yield curve from well before normalization to today.  The bars on the bottom show the change in yields over the 3+ year period. It’s different for each maturity but it’s about 150-175 bips across the curve.

Now imagine the curve shifting up *another* 150-175 bips over the next 2 years.

That’s the *clearly articulated and communicated* plan for the Fed.

Come 2021 we should be looking at 3% short term rates and 4.5-5% yields on the 10-year.

Equity investors should not be surprised as yields climb in a  2-steps forward, 1-step back path.

Valuations will feel the pressure.  Today was an example.  It wasn’t a disaster but the bears took their bite out of the tape.

See you tomorrow,